e- NEWSLETTER

June/July 2004

Real Estate Law

What Is An Illinois Land Trust?

Kerry M. Lavelle

                An Illinois Land Trust is a legal arrangement in which a qualified bank holds legal title to your real estate located here in Illinois. You are the beneficiary of the trust. As the beneficiary, you retain all rights to income and proceeds of the sale of the property, and rents received and the bank, the trustee, acts on the direction of you the property owner. Land Trusts can be created by any persons or entities capable of entering into contracts such as individuals (with adult capacity), groups of individuals, corporations, or partnerships.

                What are the benefits of an Illinois Land Trust?

                Added privacy. When a bank holds title to real estate in a Land Trust, ownership of the real estate becomes a private matter. County records reflect the bank as the property title holder, not you.

                Limited liability. As the beneficiary of the trust, personal liability when borrowing money may be avoided (absent a personal guaranty). In certain cases, liability may be restricted to the actual property, which enables other assets to be safeguarded.

                Reduced probate expenses. Titling your real estate in a land trust, similar to retitling your real estate in a revocable living trust, provides absolute probate avoidance and the elimination of probate expenses relating to the real estate.

                Other benefits include reduced risks inherent in joint ownership, eliminating the need for multiple signatures if one of the joint tenants live outside of the state, and the prevention or elimination of partition suits and red tape when selling properties.

                Notwithstanding the foregoing, clients interested in creating Land Trusts must understand sometimes there is additional red tape involved in convincing unsophisticated lenders that an Illinois Land Trust is just a titling device and does not change the substance of ownership rights of the beneficiary. In addition, other adverse effects of a Land Trust include some additional costs in directing the Land Trustee to sign deeds, mortgages, notes etc., and the misunderstanding that retitling your personal residence in the Land Trust often gives you "creditor protection".

                If you have any questions on whether an Illinois Land Trust is right for you, or how it should be integrated with your estate plan, do not hesitate to email me at klavelle@lavellelaw.com with your questions.

Taxation Law

Free Resources For Business Taxpayers Are Just A Click Away

Cameron R. Monti

                Unbeknownst to most small and mid-size business taxpayers, the Internal Revenue Service (IRS) does more than just collect taxes. It has numerous free resources that can help small business taxpayers comply with their tax responsibilities, and none of them are further than a mouse-click away.  Within the small business section of IRS.gov website, business taxpayers can, for example, learn how the tax code treats different types of business structures, apply for an Employer Identification Number or make tax payments, even watch a streaming video of a small business workshop.

                An illustration of the resources and services that small businesses can find on IRS.gov:

                Starting a Business — Everything from a new business checklist to selecting a business structure.

                Operating a Business — Find out about various expenses associated with a business and business taxes that may apply. Also lists requirements for small businesses

                                                            with employees and information on how to structure a retirement plan.

                 Closing a Business — More than shutting the door, procedures are provided for getting out of business, including forms to file.

                The Self-Employed Community — This one-stop shop for the self-employed was built with the help of taxpayer feedback.

                Industries and Professions — Advice on how to avoid problems in construction, cosmetology and more. Information on more than a dozen industries in all.

                International Taxpayers — Addresses the special tax requirements of the international community.

                Where to File — Filing addresses, by return type, for self-filers and tax professionals. Includes the top filing errors made by type of form.

                Order Free Products — Choose from the Tax Calendar, Small Business Resource Guide and more, all developed for the small business or self-employed individual.

                Small Business Online Classroom — IRS courses, self-directed learning and access to streaming video of IRS small business workshops.

                State Links — A collection of links to state government and commercial web sites.

                IRS.gov website is also the gateway to a host of e-services for small businesses:

                E-file — Filing options for employment taxes, information returns, partnerships, corporations and estates and trusts can all be found here.

                Employer Identification Number (EIN) — Small businesses may apply for one online.

                Electronic Federal Tax Payment System (EFTPS) — EFTPS is an alternative to paying taxes by check or money order. Small businesses can make payments 24 hours a day, seven days a week.  For those business taxpayers who do not have Internet access, are not computer saavy, or prefer the “old fashioned” method of seeking assistance by telephone, IRS employees are still available by phone to speak with business owners and the self-employed. Albeit IRS resources will certainly not be able to address every business owner’s questions or concerns, it is certainly a good starting-point to know whether it is prudentt o seek the assistance of a tax attorney or tax professional. To access the IRS website, click the link: www.irs.gov  If you have any other question, please feel free to contact Cameron Monti at: cmonti@lavellelaw.com

Estate Planning

How Your IRA May Effect Your Estate Plan

The Most Desirable Result

Lauren E. Schaaf

                Today individual wealth is increasingly being held in IRAs. More and more estate planners are seeing clients whose assets consist of IRAs. The reason is because the IRS allows pre-tax dollars to contribute to these accounts. The money grows on a tax-deferred basis throughout the client’s lifetime.
However, with respect to estate planning, investors must be informed as to how to make the IRA most profitable to the loved ones they leave behind. IRA assets pass on to one’s heirs via the beneficiary designations the account owner determines for the accounts. It is important for the account owner to designate whom the beneficiaries will be because without them the financial institution distributing the IRA will distribute the account to the owner’s estate and the entire balance will have to be paid out to the heirs within five years of the owner’s death. Thus, possibly stretching out the probate process for five years and taxing the heirs’ full IRA distribution as ordinary income all at once. This tax result is extreme and unnecessary.

                The desirable outcome for married couples is to have the surviving spouse named as primary beneficiary because the law favors married couples. The law says the surviving spouse may rollover the IRA. This means the surviving spouse may establish a new IRA that can receive the assets from the deceased spouse’s IRA in a tax-free transfer. Then the assets will continue earning interest and may later become a stretch IRA for the children.

                However, the surviving spouse who obtained the IRA rollover suddenly has a larger estate that is now subject to greater estate tax. Unless the surviving spouse has children to whom he or she may designate as the new beneficiaries, designating a bypass trust may be desirable. When the surviving spouse passes, the assets in the marital trust will have to be included on the federal estate tax return, but the assets in the bypass trust will escape estate taxation. However, the IRA assets distributed from the bypass trust will be taxed as regular income to the beneficiaries. Therefore, unless the IRA owner can designate specific individual beneficiaries and stretch the tax payments out over time, he or she may want to designate a bypass trust. This option if desirable if the IRA owner has no spouse or children and wants the IRA assets to be split among many beneficiaries.

                If the IRA owner is not married, a rollover is not available. The next best solution for a non-spousal beneficiary is to establish a stretch IRA. If the IRA account is compatible with the establishment of a stretch IRA, and the beneficiary is young, then a stretch IRA is best. This allows the beneficiary to defer income taxes on the rest of the account for many years, thereby allowing the assets remaining in the IRA to earn interest and thus pay for the income tax due from the beneficiary, rather than making a lump sum distribution whereby the beneficiary must pay the income tax all at once. However, if the IRA policy requires quick liquidation of the IRA upon the death of the owner, the beneficiaries should contact the financial institution to see if there are other possibilities allowing for tax deferral. In this case, the beneficiaries should involve an attorney to advocate on their behalf.

                Are you an owner of an IRA? Are most of your assets held in IRAs? Do you currently have designated beneficiaries? Are you sure they are the most profitable designations you can make? Please, consult a specialized estate-planning attorney to help decide how to make the most profitable designation for the beneficiaries’ benefit, before it is too late! Direct questions to Lauren E. Schaaf at lschaaf@lavellelaw.com.

Taxation Law

IRS Offers Penalty Refund For 2003/04 Deposit Penalties

Timothy M. Hughes

            The IRS has begun implantation of the Electronic Federal Tax Payment System-Federal Tax Deposit (EFTPS-FTD) Penalty Refund Program. This new IRS program allows paper coupon users who were assessed a Form 941, Employers Quarterly Federal Tax Return, deposit penalty beginning in 2003 the opportunity to receive a one time penalty refund.
To qualify, the employer must pay the penalty in full, enroll in and use EFTPS for one year (four consecutive quarters), and make all Form 941 payments on time through EFTPS. Beginning in 2005, the IRS will automatically determine which employers have achieved the four quarters of EFTPS compliance and reverse the most recent full paid FTD penalty minus any outstanding taxes. To obtain the refund there is no other action required by the employer.

                The IRS will look back up to four quarters prior to the four quarter compliance period for a full paid FTD penalty to abate. For example, if the employer enrolls in and uses EFTPS for all four quarters in 2004, the IRS will look back as far as the quarter beginning January 1, 2003, for a full paid FTD penalty. Any penalty paid earlier than one year prior to the four quarter compliance period are not eligible for the automatic offer. For enrollment in the program taxpayers can sign up online at http://www.eftps.gov. or by completing IRS Form 9779 EFTPS Business Enrollment Form.

                Does your business still use paper coupons in making federal tax deposits? And if so, have you been assessed a penalty in 2003 for untimely deposits? If so please contact me to discuss. Thughes@lavellelaw.com or (312)332-7556.

Business Law

What To Consider When Purchasing A Business

Theodore M. McGinn

        Purchasing an existing business creates many issues that deserve serious consideration. Often in that situation the purchaser is eager and excited to commence his new venture and therefore may overlook many aspects of the transaction many of which will come back to haunt the purchaser in the future. Careful consideration of a few factors can go a long way in protecting a potential purchaser and contribute to the success of his business.

                In connection with any purchase, it is essential that the purchaser conduct a ceratin amount of due diligence. Due diligence is a phrase that describes the evaluation of the assets that you are purchasing. It is crucial that the purchaser confirm that the assets you are acquiring are in fact what the seller represents them to be. Proper due diligence includes physical observation, review of the underlying contracts, billing records, and other substantiation supporting the services and or sales with respect to such receivables, and a professional review of the tax returns and financial statements. Many of the potential problems associated with such business can be ascertained upon conducting proper due diligence.

                Another factor that should be considered is whether the purchase is structured as an asset purchase or a stock purchase. The structure of the transaction will have a significant impact on the ultimate purchase. With respect to a stock purchase, the purchaser acquires not only the assets but the liabilities associated with the business. On the other hand, it is structured as an asset sale, ordinarily the purchaser does not assume any liabilities with respect to such assets. The exception would be any asset which encumbers a loan to a third party. Clearly though with any stock purchase you will have to factor in the amount of any outstanding liabilities associated with the business into the equation in determining the purchase price or the business.

                Another consideration is how the purchaser will finance the purchase of the transaction. More often than not the seller will want to have a lump sum payment for the purchase. However, as a purchaser, it would be in your best interest to attempt to negotiate an installment agreement whereby payments are made over a period of time. The time value of money would benefit the purchaser in structuring the payment over a period of time (of course naturally, any sophisticated seller will ask for a reasonable rate of return for any installment agreement). More importantly however, a payment plan would provide the purchaser with leverage in the event that the business turns out to be not quite what the seller represented it to be. With a lump sum purchase, once the deal is closed it is a very difficult time to recover any amount of money paid to the seller. With an installment agreement, the purchaser is in a much better bargaining position with the seller over renegotiating the transaction if necessary.

                Any purchaser acquiring a business should consider asking a seller to execute a covenant not to compete. Over a period of time, it is likely that the seller has developed significant relationships with its customers. Without a covenant not to compete, there is a possibility that upon the close of the transaction, the seller may start a competing business nearby. Once the customers of the purchased business learn that the prior owner is operating another venture, there is a possibility that such customers will shift to the seller. A covenant not to compete would prevent that from happening and protect the value of your investment.

                Careful consideration of a few important issues will go a long way to protect a purchaser. Without it, it is buyer beware.  If you have any questions, please contact Ted McGinn at tmcginn@lavellelaw.com.
 

 

This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.